Facts About Fraud: Fact #3 – Higher Authority = More Damage

Posted by Amanda Nieweler

on November 19, 2014

International Fraud Awareness Week – November 16 – 22, 2014 – #fraudhurtsbad

Facts About Fraud

We continue our International Fraud Awareness Week with our third fraud fact:

The higher up the corporate ladder, the bigger the fraud cost.

Monday and Tuesday brought you ‘bigger frauds come from collusion‘, and ‘small businesses suffer more‘, respectively. Now we’re going to talk about fraudsters that work higher up the corporate ladder.

According to the ACFEs Report to the Nations, the higher up the ladder the perpetrator is, the higher the authority, the greater the fraud losses tend to be. Even though executives (and owners) accounted for only 19% of all cases, compared to 42% of employees and 36% of managers, they tend to do way more damage with a median loss of $500,000. Check out the below charts, care of the ACFEs Report to the Nations.

You can see in this picture that owners and executives, compared with employees and managers, don’t commit fraud quite as frequently:

 

infographic bar chart position of perpetrator frequency loss

But check out this picture. Look at the financial damage owners and executives did to their organizations:

 

infographic bar chart position of perpetrator median loss

The reason for this damage tends to be represented by their level of authority within their organizations and that they typically have greater access to assets and are more than likely better able to evade or override controls, compared to employees in lower levels.

Oh, you haven’t heard about Enron? In 2000 it was starting to crumble under it’s own weight. The CEO, Jeffrey Skilling, was very “magical” with numbers and finances. He had a way of hiding financial losses of the business. The scheme was to hide the losses and make the company appear to be more profitable than it really was. Of course the SEC caught on and in 2001 Enron filed for bankruptcy.

There are lasting effects of this. The shady dealings of Enron show just what corporations, and those higher up the ladder, are capable of. And it proves our point – those in higher authority cause more damage.

Something else to note: according to the ACFE survey, education level plays an important role in perpetrator persona. Those with postgraduate, and/or university degrees had a higher median fraud loss. And not surprising, 66% of our owners and executives causing all this damage at their organizations, had such degrees… which might explain why their frauds cost more because they might possess greater technical knowledge and knowhow.

There’s always someone in these “fallen from grace organizations” who knew about the illegal happenings. In any organization, employees catch on pretty quickly to activities that probably should not be happening. There’s a good chance there’s a clue to the perpetrators actions and character that gives them away. We’ll talk about that on tomorrow’s post: Fraud Fact #4: Behavioral Red Flags.

There’s also a good chance that employees will want to report on these questionable activities through a third-party ethics reporting system. So let them; it’ll potentially save your organization a whole lotta hassle.

Don’t forget, spread the word #fraudhurtsbad.

eBook: 7 Reasons to Implement a Whistleblower Hotline

Sources:
http://www.investopedia.com/articles/stocks/09/enron-collapse.asp
http://www.acfe.com/rttn/docs/2014-report-to-nations.pdf